Appropriate Expected Return and the Relationship with Risk

© 2019 International Management Institute, New Delhi. Theoretically, risk-averse investors who expose to higher level of risks should expect to be compensated with more returns. However, prior studies empirically found inconclusive and often counterintuitive results. Motivated by advanced econometri...

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Main Authors: Panutat Maneemaroj, Ravi Lonkani, Chanon Chingchayanurak
Format: Journal
Published: 2019
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http://cmuir.cmu.ac.th/jspui/handle/6653943832/65431
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Institution: Chiang Mai University
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spelling th-cmuir.6653943832-654312019-08-05T04:33:19Z Appropriate Expected Return and the Relationship with Risk Panutat Maneemaroj Ravi Lonkani Chanon Chingchayanurak Business, Management and Accounting © 2019 International Management Institute, New Delhi. Theoretically, risk-averse investors who expose to higher level of risks should expect to be compensated with more returns. However, prior studies empirically found inconclusive and often counterintuitive results. Motivated by advanced econometric techniques and choices of risk and return recently introduced in literature, we justify and choose the appropriate models and proxies to study the risk and return trade-off pattern in The Stock Exchange of Thailand. Instead of using historical returns mentioned in prior studies, this study chooses the earning ratio to proxy the expected return. For the risk and return trade-off testing model, we employ the ICAPM model with Glosten, Jagannathan and Runkle-GARCH (GJR-GARCH) and GJR with Continuous and Jump Variations (GJR-CJ) as volatility function. Consistent with the theory, results show that the baseline models can explain the positive relationship between risks and returns. By adding the effect of a rare event which can be estimated from the jump process of the data, the forecast accuracy is more improved. In addition, the results find that it is possible that this proxy can be applied in another model which is based on the mean and variance models. Finally, the results from the forecasting model and other models indicate that using an Earning to Price (E/P) ratio as a proxy for expected returns is more appropriate than using the historical return. 2019-08-05T04:33:19Z 2019-08-05T04:33:19Z 2019-01-01 Journal 09730664 09721509 2-s2.0-85063592458 10.1177/0972150919830879 https://www.scopus.com/inward/record.uri?partnerID=HzOxMe3b&scp=85063592458&origin=inward http://cmuir.cmu.ac.th/jspui/handle/6653943832/65431
institution Chiang Mai University
building Chiang Mai University Library
country Thailand
collection CMU Intellectual Repository
topic Business, Management and Accounting
spellingShingle Business, Management and Accounting
Panutat Maneemaroj
Ravi Lonkani
Chanon Chingchayanurak
Appropriate Expected Return and the Relationship with Risk
description © 2019 International Management Institute, New Delhi. Theoretically, risk-averse investors who expose to higher level of risks should expect to be compensated with more returns. However, prior studies empirically found inconclusive and often counterintuitive results. Motivated by advanced econometric techniques and choices of risk and return recently introduced in literature, we justify and choose the appropriate models and proxies to study the risk and return trade-off pattern in The Stock Exchange of Thailand. Instead of using historical returns mentioned in prior studies, this study chooses the earning ratio to proxy the expected return. For the risk and return trade-off testing model, we employ the ICAPM model with Glosten, Jagannathan and Runkle-GARCH (GJR-GARCH) and GJR with Continuous and Jump Variations (GJR-CJ) as volatility function. Consistent with the theory, results show that the baseline models can explain the positive relationship between risks and returns. By adding the effect of a rare event which can be estimated from the jump process of the data, the forecast accuracy is more improved. In addition, the results find that it is possible that this proxy can be applied in another model which is based on the mean and variance models. Finally, the results from the forecasting model and other models indicate that using an Earning to Price (E/P) ratio as a proxy for expected returns is more appropriate than using the historical return.
format Journal
author Panutat Maneemaroj
Ravi Lonkani
Chanon Chingchayanurak
author_facet Panutat Maneemaroj
Ravi Lonkani
Chanon Chingchayanurak
author_sort Panutat Maneemaroj
title Appropriate Expected Return and the Relationship with Risk
title_short Appropriate Expected Return and the Relationship with Risk
title_full Appropriate Expected Return and the Relationship with Risk
title_fullStr Appropriate Expected Return and the Relationship with Risk
title_full_unstemmed Appropriate Expected Return and the Relationship with Risk
title_sort appropriate expected return and the relationship with risk
publishDate 2019
url https://www.scopus.com/inward/record.uri?partnerID=HzOxMe3b&scp=85063592458&origin=inward
http://cmuir.cmu.ac.th/jspui/handle/6653943832/65431
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